Why Target Stock Just Went Up 12%

Aim (TGT 12.78%) Shares shot up 12 percent by 11:15 a.m. after the company beat Wall Street analysts’ forecasts for second-quarter sales and earnings Wednesday morning.

Heading into the quarter, analysts expected Target to earn $2.18 per share on sales of $25.2 billion — but Target beat those forecasts by a bar. Sales were $25.4 billion, while earnings were $2.57 per share.

Target’s Q2 earnings

Target reported a 3% gain in second-quarter sales year-over-year, including a 2% gain in same-store sales. What really made the difference was e-commerce sales. They grew nearly 9% year-over-year, helping to provide that final 1% of total sales growth.

Target contributed to this still fairly modest sales growth with a dramatic 160 basis point increase in profit margin (now 6.4%), illustrating the margin advantages of selling online. And with each incremental sale generating more profit for Target, bottom line profits increased — up 42% year over year.

CEO Brian Cornell underscored that effect, noting Target’s “double-digit growth in our same-day delivery services,” illustrating how achieving more online sales has helped Target fuel the company’s turnaround.

Is the target stock a buy?

Now the question is whether Target can keep going. Turning to guidance, management warned that same-store sales growth would likely slow to a range of 0% to 2% in Q3 and predicted that overall growth for the year would also fall within that range. Regardless, management felt comfortable raising earnings guidance for both Q3 and the year.

Target predicts it will earn about $2.25 per share in the ongoing third quarter and end 2024 with about $9.35 per share in profit.

What does this mean for stock valuation? Divided into a share price of $160, earnings of $9.35 imply a still modest P/E ratio of 17. Given that most analysts see the company’s growth slowing to around 8% annually over the next five years – – and that Target itself forecast a near-term slowdown — the stock is starting to look fully priced and likely no longer a buy.